By Baruch Lev and Feng Gu
Another earnings season is over, and the controversy about non-GAAP earnings-those alternative earnings numbers disclosed by companies-rages on. "Wishful thinking! Kool-Aid! Outright deception!" say the detractors. "Should have been banned by the SEC long ago!" "Not so quick," counter the supporters: GAAP earnings-those statutory performance measures calculated according to generally accepted accounting rules-no longer reflect true enterprise performance, and therefore it is incumbent upon corporate managers to set the record straight by disclosing alternative, more meaningful performance figures. Over 90% of S&P 500 companies concur: They routinely provide various non-GAAP measures of earnings, sales, and other indicators. But this widespread reporting of non-GAAP measures seems only to fire up the detractors. And thus, the controversy continues.
We wish to inform the non-GAAP debate with certain salient facts-empirical evidence-sorely missing in much of the debate. You'll be surprised by our findings. We collected a sample of 265 S&P 500 companies reporting fourth-quarter 2016 earnings, 212 of those also disclosed non-GAAP earnings. Based on this sample, we address the main criticisms of non-GAAP earnings.
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Baruch Lev is the Philip Bardes Professor of Accounting and Finance.